Sancel Inc.is planning a transaction that will generate $70,000 taxable income and cash inflow.The transaction is structured so that Sancel will receive the cash and report the income this year (year 0).Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Sancel will receive the cash this year,but report the income two years later (year 2).Sancel's marginal tax rate is 21%,and it uses a 10% discount rate to compute NPV.

Question

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The tax deferral allows Sancel to delay paying taxes on the $70,000 income. The tax savings from deferring the tax payment for two years is $70,000 * 21% = $14,700. The present value of this tax savings, discounted back two years at a 10% discount rate, is $14,700 / (1.10)^2 = $12,102. Subtracting the immediate tax payment of $14,700 gives an increase in NPV of $2,558.